A nonprofit hospital in New Jersey has lost its property tax exemption over a number of different issues, including overly lavish compensation of its executives and improper deals with physicians. According to BVWire, this case was being closely watched and could trigger similar actions from cash-strapped municipalities—as well as spark challenges to tax-exempt status from the feds.

Crossed the line: The New Jersey Tax Court ruled that the Morristown (N.J.) Medical Center is not entitled to a property tax exemption because its activities are so intermingled with for-profit doings that it no longer resembles a charitable institution. According to an email alert from the American Health Lawyers Association (AHLA), a number of issues caused the hospital to cross the line, including having a corporate structure laced with for-profit subsidiaries, unreasonable compensation of executives, questionable contracts with for-profit physicians, improper incentive pay deals with employed physicians, and third-party agreements that were improper profit-sharing deals in disguise.

According to a report on NJ.com, Judge Bianco ruled that the hospital failed to establish the "reasonableness" of the salaries it paid to executives. He noted that the hospital’s comparison of its executive salaries only to those of its peer group hospitals creates a "wholly self-serving" justification. The hospital’s CEO was paid $5 million in 2005, including perks such as an automobile stipend, a cell phone plan, and a golf club membership.

As a result of the ruling, the hospital will have to pony up $2.5 million per year in property taxes for the years at issue (2006 to 2008). There is no word on whether the hospital will appeal.

Watch out: “Nonprofit entities everywhere” have been watching this case, according to attorney Rebecca M. Waddell (Hall, Render, Killian, Heath & Lyman PC), who wrote the AHLA alert. Of course, this ruling only concerns the organization’s state property tax exemption and does not affect its tax-exempt status under federal law. “If, however, other courts adopt the reasoning of the New Jersey Tax Court, the door may be open to nonprofit status challenges, with the potential loss of cherished tax-exempt status,” says Waddell.